COLUMN-Faster, deeper, more power in N. American rig market:Kemp

By John Kemp

LONDON Dec 10 North American oil and gas
production is on the verge of another revolution as older
drilling rigs are replaced by equipment that can drill the same
well in half the time and bore much longer horizontal sections
underground.

The number of land-based rigs drilling for oil and gas in
the United States has fallen 12 percent since November 2011,
according to oilfield services company Baker Hughes
International.

The drilling of new wells is sensitive to forecast oil and
gas prices. Slumping gas prices over the past year have resulted
in a sharp drop in the number of rigs employed. Some rigs have
been shifted to oil or liquid-rich "wet" gas plays, while more
than 200 mostly older ones have been idled over the past 12
months.

In a sign of the coming industry-wide rationalisation,
Precision Drilling, one of the largest drillers in North
America, announced on Monday it was decommissioning 42 of its
older tier-3 drilling rigs and another 10 tier-2 machines. The
company plans to exit the tier-3 contract drilling market
altogether as it refocuses its operations on the more profitable
tier 1 and 2 markets.

Crude rig counts tell only half the story, however. New
technology and the development of standardised "assembly-line"
or "factory" drilling practices mean the industry can now drill
more wells faster and with fewer machines - slashing costs and
lowering the breakeven price for U.S. and Canadian producers.

Most oil analysts still focus exclusively on rig counts, but
counts are misleading when the rig fleet is changing rapidly.
Relying on these raw figures has caused many oil analysts to
underestimate the total amount of exploration and production,
while focussing on day rates for rig hire has caused them to
overstate costs.

Just as the perfection of long-known but expensive hydraulic
fracturing techniques in the mid-2000s paved the way for the
first shale gas (and then oil) revolution, improvements in
drilling efficiency and better reservoir management will open
the way for a second revolution - provided that oil and gas
prices remain high enough to incentivise the investment.

FLEET UPGRADE

Most oil and gas wells are drilled by specialist drilling
firms under contract, either long-term or spot, to an
exploration and production company.

The North American market is dominated by four big
companies, which between them account for around half of all
rigs operating across the United States and Canada. Besides
Precision Drilling with around 374 rigs, Helmerich & Payne
has 290, Nabors 390 and Patterson-UTI
206, according to recent company filings.

The total number of active rigs across the United States and
Canada remains broadly unchanged since oil and gas prices peaked
in 2008. But that masks an enormous change in the rig fleet.

In 2008, the U.S. fleet consisted of around 1,000 older
mechanical rigs, another 600 with silicon-controlled rectifiers
(SCRs) and direct current (DC) motors, and just 250 units
employing alternating current (AC) motors.

DC motors traditionally provided more power and speed
control, but advances in technology mean AC machines can now
provide much more precision and flexibility.

By 2012, the number of mechanical rigs had fallen to 600 and
SCR rigs were down to 500, but AC units had climbed to 600,
according to a recent presentation by Helmerich, the most
profitable drilling firm, which owns about 40 percent of all AC
units.

Helmerich dominates the supply of AC rigs (with around 250),
far more than Nabors (150) or Patterson (60), which helps
explain why the company has been more profitable recently and
why its share price has significantly outperformed its peers.

Helmerich also benefits from a much greater exposure to oil
and liquids-rich exploration rather than dry gas plays. Its
share price has fallen just 7 percent over the past 12 months,
compared with a 20 percent drop for Nabors and 34 decline for
Precision.

FASTER AND LONGER

Helmerich claims one of its ultra-modern rigs can drill a
well in just 15 days (three to move the rig onto the site and
set it up, nine to actually drill and three additional days),
compared with an industry-wide average of 30 days for a
conventional rig. Helmerich can charge out its rig at 60 percent
above the industry average and still leave the client with
significant cost savings of around $500,000 per well.

Precision, which has been the worst performer in the last
year, has been substantially upgrading its legacy rig fleet.
Since 2007, the company has added 110 new build rigs to its
fleet and upgraded another 40, according to Chief Executive
Kevin Neveu.

"Our decision to retire and dispose of the legacy tier-3
rigs is an important point in the company's transition," Neveu
explained.

"While some legacy tier-3 rigs may have market niche
opportunities, the drilling industry's growth and success will
be driven by improved drilling efficiency, safety performance
and environmental performance."

Amid all this upgrading, crude rig counts provide little
clue about the number of wells being spudded and total footage
drilled.

In 2008, 332 million feet of exploratory and developmental
oil and gas wells were drilled in the United States, according
to estimates compiled by the Energy Information Administration
(EIA), up from a low of 101 million in 1999.

No estimates are yet available for more recent years.
Nonetheless, the oil and gas industry will probably have drilled
much more footage in 2012 than 2008, even with the same number
of rigs, based on shorter drilling times and other improvements
in technology.

Helmerich claims its rigs can drill 24 wells per year,
double the number of a conventional set-up.

As the new technology diffuses throughout the sector,
improvements in efficiency could have as a big an impact on oil
and gas production as the original fracking revolution.

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